Balancing the Mission Checkbook

Last week, I unplugged from email, Blackberry, and voicemail for a nine-day vacation. I’m sure you’ve all enjoyed the times when you change pace, slow down, and relax. It was indeed a great break – but interestingly, I was not taking a break from nonprofits. They’re everywhere – and that’s a wonderful thing. Our trip started with a few days in Virginia in the Shenandoah Valley and the Blue Ridge Mountains and ended with some time in Washington, DC. With that itinerary, I’d expected that our time would be dominated by businesses, like hotels and restaurants, and by the National Park Service for our visits to the Skyline Drive, the National Mall, and other historic sites. What I hadn’t really thought about was how much nonprofits would be woven into the trip. Both Thomas Jefferson’s home at Monticello and George Washington’s Mount Vernon are owned and operated by nonprofit organizations, and are supported by fundraising, fees, and gift shop sales. In DC, the National Mall is a public park, but many of the events and special features are created and supported by nonprofits. We were lucky enough to be there at the peak of the cherry blossoms and the (nonprofit) National Cherry Blossom Festival. I know that this photo looks like a postcard, but I really did take it myself! To round off our nonprofit immersion, we had dinner at the funky Busboys and Poets restaurant, operated by a nonprofit, Teaching for Change.

It’s probably not a surprise that nonprofits are everywhere – and that’s a good thing, right? So maybe we should push back the next time someone brings up the argument that there are too many nonprofits, or that “someone” should prevent new nonprofits from forming. While I was on my nonprofit tour, in fact, there was a blog exchange on this very topic that you can find at Give and Take. I’ll confess that I’ve contributed to this idea on occasion, but my trip and the time I had to reflect on the presence and role of nonprofits has made me re-think this. Come on in! If a group of people have the commitment and passion to help the community, and are entrepreneurial enough to pull together an organization and programs, then I hope they can find their role and support. It isn’t easy. The field may be crowded, and funding is competitive, but important work is being done. Thanks.

I have shared some of my thoughts and opinions about the field of social enterprise in this blog, including the question of whether the hubbub about creating business ventures is just a new name for a long-standing practice (see Is Social Enterprise Really New or Different). However, I have to extend my congratulations and admiration to the Animal Humane Society (AHS) for their plans to open a premier pet boarding facility at the Minneapolis-St. Paul airport. This plan sounds like a real winner that merges the assets of the nonprofit with a real market demand. I have high hopes that the return to the AHS will not only be financial, but will also increase their visibility, community support and donations, and reputation. The plans are described in a press release issued on March 10th.

When I lead discussions with nonprofits interested in finding a social enterprise idea to pursue, I encourage them to resist the temptation to replicate what looks like a good idea that they read about in an article or heard at a conference. The best enterprises are grounded in both the mission and the assets of the organization. The most successful enterprises support the mission beyond a projected financial return. They also take advantage of one or more assets, such as knowledge and expertise, location, understanding of a community, and reputation. To be financially viable, an enterprise must also find a market – a bona fide market that is willing, and wants, to buy the service or product.

The pet boarding facility looks like a good idea on all of these fronts. It’s a mission fit, takes advantage of organizational assets including understanding of how people relate to and care for their pets, and the reputation of the organization. The market demand is demonstrated every time you talk to a colleague who has to take a half day off before a vacation to drive across town to drop off and then pick up their pet. There are risks, of course. The facility is expensive ($4.25 million) and the AHS is investing $750,000 of their own designated funds to launch the venture. The goal is to return financial dividends to the nonprofit to support other programs, and the pet boarding facility is structured as a for-profit subsidiary of AHS.

Best wishes to the AHS on this venture – and thanks for the great case study for us all to observe.

We’ve worked with several nonprofit organizations during the difficult period leading up to closing the organization. Sometimes the decision is internally driven and intentional, and sometimes it’s after fighting it, kicking and screaming. How do you know if it’s time to close, and how to make such a monumental decision? I can think of three specific instances with very different characteristics and outcomes. The first is an arts organization that carefully and systematically paid their obligations and closed their doors after several difficult years of declining earned and contributed income; the second a youth-serving nonprofit that stayed in denial for too long before filing bankruptcy and leaving both students and creditors uninformed; and last is a small organization that remains in operation, though their relevance in the community and support from both donors and volunteers dropped off years ago. They stay alive as long as the director is willing to work with little compensation and little support. In another situation, though, I worked with an organization whose executive director repeatedly suggested closing the doors because fundraising was so difficult. The board realized that the mission was as vital as ever, though, and the solution was a different, less burned-out, director to bring new energy and ideas. These are important organizational questions that touch on financial, governance, fundraising, and mission questions. There aren’t easy answers or absolutes when it comes to closing or changing structures. Come participate in an ongoing discussion of these questions in an online discussion at Nonprofit Quarterly’s Web site - see the invitation from editor Andrew Crosby below.

Find out how one organization weighed the decision about whether it should close, and contribute your own analysis of whether they made the right decision in the Nonprofit Quarterly Online Forum.

Beginning today you can join Mark A. Hager of the University of Texas, San Anton, and Kate Barr of the Nonprofits Assistance Fund in the Twin Cities, to discuss “The Ultimate Question,” authored by Mark and published in the Fall 2007 issue.This will be a great discussion for executives, consultants, board members, and funders interested in how such decisions are made — and may be considering such decisions themselves.Just register on NPQ’s Web site to access the Forum and join us for a thought-provoking exchange where you can offer your experience, pose questions, and comment on those of others.

Once you have registered, a link to the NPQ Forum appears under the User Menu. Inside you’ll find a reprint of the case, financial background material, and some starter discussion threads that you can add to, comment on, or create your own.

So register on the NPQ Web site today to participate. Andrew Crosby, Editor

p.s. If you have any technical questions, contact webmaster James Morgan. For any questions regarding content, please contact Andrew.

Imagine this, the development director rushes in to interrupt a board meeting with the news that you have just received an unexpected, and unrestricted, gift of $50,000. How would the management and board decide how to use the new funds? (Assume for this little exercise – or fantasy, if you prefer – that your annual budget is balanced and you have sufficient cash flow to pay the bills.) For many nonprofits, there would be no doubt about it – every cent of the $50,000 would be used as soon as possible to serve as many people as possible. A homeless shelter would add more beds, a youth center would expand a program, and a clinic would increase free clinic hours. For many members of the board and staff, the decision seems simple and obvious – in the face of so much need out there, how could you not spend the money to increase services?

The long-term result of this way of approaching financial management is what Elizabeth Keating calls the “Current Services Trap.” By using all available resources to meet urgent, short-term needs, nonprofit organizations undermine their long-term stability and viability. Keating described the trap and accompanying organizational and financial characteristics at the Capital Ideas Symposium that was presented earlier this year by the Hauser Center and the Nonprofit Finance Fund. Keating’s article is printed on pages 11 – 16 of the full proceedings – it’s worth reading!

I agree with her basic premise that nonprofits and funders must understand the importance of building infrastructure, cash reserves, professional staff, and appropriate capital to support their mission. One of the toughest things to do, though, is to make the case for these investments in nonprofits, and Keating lays the groundwork for us by describing what she calls the three myths that sustain the current services trap. The myths include the notion that nonprofits address urgent needs that can be solved quickly if we have enough funding. This assumes that providing more services would be (a) easy to do, and (b) would solve the problems. But would homelessness really be “solved” by adding more beds to a shelter? The problems that nonprofits address are complex, difficult, and much bigger than a simple service. To break out of the Current Services Trap, our hypothetical nonprofit board would need to consider ways to use the windfall gift to build infrastructure, innovation, technology, and human capital. The payoff will multiply.

I read a great example of this kind of breaking out of the trap in the November 7, 2007 StarTribune story, Can Metro-Area Hunger be Eliminated in Five Years? Five Twin Cities food shelf organizations are working together to move beyond providing groceries today, so that they also address the bigger problems the cause their clients to need services. “Instead of trying to incrementally reduce hunger bit by bit, these groups want to reorganize the way food shelves work, with the goal of ending hunger altogether in the metro area by 2013.” There wasn’t a budget included, but you can be sure that this will take a lot more than funds for current services – this would require investment in long term planning, infrastructure, fundraising, staff, and communications. It’s a great case study for the future.

Where do you turn when you get sick? I don’t hesitate to visit our clinic, make an appointment for diagnosis and treatment, knowing the bill is paid by an invisible system courtesy of our good health insurance plan. What if my family didn’t have this insurance, or if our clinic wouldn’t accept our plan? Fortunately, we could call one of Minnesota’s 16 community health clinics (CHC) and receive high quality, appropriate care. Last night I attended an event hosted by the Minnesota Association of Community Health Centers celebrating National Health Center Week and the importance of community health centers (CHC) in Minnesota. The 16 centers in the state served 190,000 patients last year and health center board members, staff and other supports gathered to celebrate their success. At least 51 percent of CHC board members must be patients at the clinic, assuring a strong voice for the community.

The work we do at Nonprofits Assistance Fund (NAF) is rich in variety since we work with Minnesota nonprofits in all fields – social services, housing, arts, education, and on and on. A few months ago I wrote about our experience working with charter schools and the expertise we have developed in that part of the nonprofit world. Through our Minnesota Primary Care loan fund, we have also developed expertise in working with community health centers.

While their budgets have grown, clinics are constantly under financial stress because of the complex and changing system of payment, reimbursement and grant funds on which they rely. CHCs serve people who may not otherwise have access to quality medical or dental services because they are uninsured or seriously underinsured. Many patients at CHCs are covered by public health care programs (including Medicaid and Minnesota Care) and can also receive grants from both federal and state agencies that support health and human service programs. The number of uninsured patients has been increasing by almost eight percent each year, and the costs of providing quality care are magnified by the severe or chronic conditions faced by patients who have not had consistent access to care. Additional costs are often needed as well, including translators and health care educators to serve very diverse patients.

Most of our work with clinics has been for lending to help with cash flow shortfalls caused by processing time and delays of reimbursements from a web of public programs and the high costs of facilities, equipment and medical supplies. When most nonprofits prepare cash flow projections – which we always encourage – they have a pretty good idea of when their grants and contract funds will be received. Some of the payments received by clinics have been delayed for more than a year while they work through reporting, documentation and reconciling overlapping programs and their requirements. That has made cash flow management more challenging then ever. Fortunately, recent changes in processing and payment in Minnesota has eased some of the difficulties – at least for the time being. As we learn in every field of nonprofit service, the needs in the community are growing, financial resources are limited and there is much work to be done.

Our lending and financial management assistance for clinics has been supported by capital funds and grants from the Robert Wood Johnson Foundation and has been in partnership with The Minnesota Department of Health’s Office of Rural Health and Primary Care . The ORHPC provides a variety of research, information and grant programs. Read their recent overview of these safety net clinics in the ORHPC Summer 2007 Newsletter. We recently issued a report about this work, Patient Capital: Minnesota Primary Care Loan Fund 10-Year Report

We passed a milestone this week at Nonprofits Assistance Fund when we approved our 50th loan to a Minnesota charter school. We work with nonprofits in every field of service, but when I tell people that we work with charter schools I often get responses like, “Isn’t that really risky?” or “I’ve heard that charter schools have really weak financial management. Can they pay the loan back?”

Our experience with charter schools has been interesting, and largely positive. We have made 50 loans totaling $5.7 million to charter schools in the last eight years. So far, we have written off $5,000. That’s all we’ve lost. I say that our experience has been interesting, though, because at least half of the schools we’ve worked with were facing pretty serious financial problems when we made the loan. That would suggest that I might agree with the comments that schools aren’t well managed. But I don’t agree – I think that’s the myth. Nonprofits Assistance Fund’s mission is to build financially healthy nonprofits and we often work with organizations at a time when a bank is not able to approve a loan within bank lending policies. We take some extra risk and then work closely with the nonprofit, schools in this case, to help them improve. I attribute our success in lending to schools to the combination of the school leaders’ commitment and determination to make the school succeed and Nonprofits Assistance Fund’s expertise in school finance and financial management. The fact that most of the schools have emerged from their financial problems is the positive part of our experience and the reality of charter school management.

The reality is that the management quality of most charter schools in Minnesota is on par with the management of nonprofit organizations overall. It’s hard work to start a new enterprise, and charter schools tend to start and grow pretty quickly. Ask a small business owner what it’s like to manage rapid growth – they’ll tell you that it’s challenging. Most of the serious problems with schools have been in the first few years of operation, and charter schools are a new industry. Minnesota was the first state to authorize charter schools, and the first schools opened just 15 years ago. There has been an unusual amount of attention given to financial problems in charter schools because they operate with public money (since they are public schools). You can learn all about Minnesota’s charter schools from the Minnesota Association of Charter Schools. Minnesota has 131 charter schools in operation and at least another 19 approved to open in the next year or two. Combined, they serve 23,500 students by offering a variety of approaches to curriculum and teaching and learning environments. Since each child has individual needs, charter schools offer an option for families. There has been positive news about schools as well, highlighting the educational innovations for which these schools were created. A bigger question for charter schools will be the long-term measure of their success in raising student achievement and engaging with families and communities. Reports are a mix so far, but this is a young field with a very big job.

You can also read about Metro Deaf School, one of the charter schools we’ve had the pleasure of working with.